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Always Remember the 80-20 Rule

Foreign companies have made a great contribution to Japan's economy and society for decades, and the best is yet to come. But to be successful, you have to make some changes, and that's a lesson that each generation has to learn the hard way.by John R. Malott

John R. Malott was a noted "Japan Hand" during three decades of service as a U.S. diplomat. He now resides in Southern California and can be reached at Johnmalott@aol.com.

One of the advantages of having some gray hair is that you think you've seen and heard it all before. We like to believe that we're passing on "wisdom" and "perspective." To others, it is simply telling "old war stories."

But I was thinking the other day about the great success that such American imports as McDonald's, Disneyland, Mister Donuts, and 7-11 enjoy today in Japan. I can remember when all of them first opened in the Land of the Rising Sun. In the 1970s I was a (young) commercial officer at the US Embassy in Tokyo, responsible for promoting American consumer goods.

And I remember how many Japanese told me that all of these companies would fail in the Japanese market. Yes, fail.

Consider McDonald's: "We Japanese do not eat beef. We don't like hamburgers and French Fries."

Or Mister Donuts: "We Japanese don't like American donuts. Why should we go to Mister Donuts for coffee? We have so many wonderful coffee shops already in Japan. And we don't dunk our donuts in coffee. How disgusting!"

Or 7-11: "Why do you Americans call it a convenience store? Nothing is more convenient than the mama-papa stores we already have. I've been to a 7-11 in America and seen what they sell. We don't want to buy those things. We want Japanese food."

My personal favorite was when I tried to find out, pre-Tokyo Disneyland, why Disney's merchandise licensing royalties in Japan were so low: "We don't like rodents, and Mickey Mouse is a rodent. And we associate Mickey Mouse and Donald Duck with the occupation."

When my secretary at the Embassy, a wonderful young woman named Yuko Suzuki, left to join Disney Japan and become the second person in their licensing office, the reaction among her fellow employees was "Poor Yuko!! Why did she do that?"

Poor Yuko, indeed! She should have taken stock options.

As time went by, these companies all became great successes in Japan. McDonald's has more stores in Japan than anywhere in the world except America. When 7-11's US parent, the Southland Corporation, got into financial difficulty, it was 7-11 Japan's owner, Ito-Yokado, that came to the rescue. Ditto for Mister Donuts; the Japanese partner, an Osaka firm named Duskin, helped bail out the US operation.

And Tokyo Disneyland and Disney's "character goods?" Perhaps the defining moment came when Mickey Mouse appeared as a special guest on NHK's 1999 Ko-Haku (Red-White) broadcast on New Year's Eve, the most widely watched broadcast of the year. NHK avoids commercialization like the plague, but there were Mickey and Minnie in their best kimono, inviting 70 million viewers to come to Tokyo Disneyland.

What does all this mean? Is this an "I told you so?" Far from it.

When I go into a Mister Donuts in Japan, I can't find any donuts I recognize. And when I walk into a 7-11, I am turned off by the smell of oden at the cash register. I fare better at McDonald's, as long as I remember to call French Fries "MacFry Potato." As for Tokyo Disneyland, well, Professor Aviad Raz has written a book about it, Riding the Black Ship, which describes how the theme park has become Japanese even while marketing itself as foreign.

The point is that even though these companies have world-beating business models, when they came to Japan they made whatever changes were needed to appeal to a different clientele. You can be No. 1 in America, but you got there because you understood your American customers.

Failure or success in understanding your customers in that very different environment called Japan helps explain why Merrill Lynch has lost $250 million in two years in its Japan operations, while Goldman Sachs has its Japanese competitors running scared (and trying to generate a backlash against their success). It also explains why Gateway has emerged as the most innovative computer marketer in Japan and Yahoo is the No. 1 portal, while AOL Japan has the highest drop rate of any Internet service provider.

Let's call it the 80-20 rule. If you are a world-class company, eighty percent of what you do in America or Europe will work in Japan. But you'll have to change about 20 percent of what you do, in some combination of the product, the marketing, and the delivery system. You need to understand why the outspoken, tie-less Bit Valley grok who would dazzle them on Sand Hill Road (and who hasn't shaved or taken a bath in three days) might not get the same reaction in Marunouchi. The task of a successful company is to find what that 20 percent is, and then make the necessary changes.

Fortunately -- and here I go telling more war stories -- you require fewer adaptations today than you did 20 or 30 years ago. Back then it wasn't 80-20; it was more like 60-40 or worse. When Kellogg's introduced breakfast cereals, then unknown to Japan, they were told to market them as snack foods. They were "over-roasted" and marketed as snack foods to be eaten without milk -- like some kind of exotic osembei from Battle Creek, Michigan. But today Kellogg's corn flakes are the same in Japan as they are in America.

You can chalk that one up to the tremendous number of Japanese who have lived and traveled overseas. Thanks to internationalization, now they know "the real thing." Keizo Saji, the recently deceased head of Suntory, discovered Haagen-Daas ice cream while vacationing with his family in Hawaii, and he was determined to bring it to Japan. But rather than insisting that changes needed to be made for the Japanese palette, he insisted that it should be the same as what Japanese tourists such as himself first discovered in America. "Otherwise, the customers will say it's not the real thing," he told me.

That was turning point in the Japanese mentality that mandated that everything must be changed to match so-called Japanese tastes. No longer would middle-aged Japanese men decide what young Japanese women would want to buy.

But the 60-40 rule has only gotten as far as 80-20.

Today, in the world of technology, engineers speak the same language. So in the world of high-technology, it is easy to believe that computers are computers, and that what works in the high-tech world in America will work in Japan. All we need to do is localize our software, and translate from English into Japanese. As for staffing our companies in Japan, Silicon Valley companies come to Japan and look for people who think and talk like them. Find somebody young, find a hotshot, find someone who is "just like us." After that, it's all gravy.

Wrong.

In a recent J@pan Inc. column, about the venture capitalist business investor Louis Ross provided an excellent description of the contribution that VCs can make to Japan's IT development. I agree, especially with respect to their ability to assess new technologies and entrepreneurs, and their connections to the industry in the US and Europe.

He thought, however, that in a previous column I was being negative on foreign VCs and incubators. My point with respect to the "black ships" is that no one should expect the development of the Internet in Japan to come in exactly the same way, or with the same kinds of people and companies, as it has in the US. The i-mode and keitai phenomenon certainly are proof of this.

But Mr. Ross took special exception to my belief that it will be some of Japan's more progressive "mainstream" companies that will help incubate and develop the high-tech companies of tomorrow in Japan. He called these companies the "bureaucratic, inefficient, Old Economy monoliths" of Japan.

But let's look at the wireless industry in Japan -- touted daily as the shining star of Japan's IT future. Who is behind DoCoMo? That old stodgy NTT. And who makes all those super-fancy cell phones with the color LCD screens and built-in video cameras and your choice of 20-some songs? The usual suspects -- Matsushita, NEC, Kyocera and so on. And who sells them? The usual electronic outlets -- except for Hikari Tsushin, which, as we all know, crashed and burned earlier this year. And who is behind the leading Internet service providers in Japan? NEC, Fujitsu, Sony, Panasonic, and so on.

To borrow J@pan Inc.'s June cover line, look inside the pocket where Japan's future lies, and, for better or worse, you might find some mainstream Japanese "monolith."

I've been watching Japan for over 30 years, and I've seen one new generation after another go to Japan expecting that they can do things the same in Japan as they do in the US. But that's a lesson that each new generation has to learn for itself the hard way, I guess.

You still need to look for that 20 percent that is different.

And I've also seen so many Japanese predict doom for foreign companies in Japan. The ones that proved them wrong, as I said, were the ones that were willing to recognize that they just didn't have a 'better mousetrap," they also were operating in a different environment.

But Japan is changing. Find the 20 percent that hasn't, and success is yours.